TREASURY INSPECTOR GENERAL FOR TAX
ADMINISTRATION

RECOVERY ACT

Interim Results of the 2010 Filing Season

March 31, 2010

Reference Number:2010-41-047

This
report has cleared the Treasury Inspector General for Tax Administration
disclosure review process and information determined to be restricted from
public release has been redacted from this document.

Phone Number |202-622-6500

Email Address |inquiries@tigta.treas.gov

Web Site|http://www.tigta.gov

HIGHLIGHTS

INTERIM RESULTS OF THE 2010 FILING SEASON

Final Report issued on March
31, 2010

Highlights

Highlights of Reference
Number:2010-41-047 to the Internal
Revenue Service Commissioner forthe Wage and Investment Division.

IMPACT ON TAXPAYERS

The
filing season is critical for the Internal Revenue Service (IRS) because it is
the time when most individuals file their income tax returns and contact the
IRS if they have questions about specific tax laws or filing procedures.

WHY TIGTA DID THE AUDIT

This report presents selected
information related to the IRS 2010 Filing Season results as of either March 5
or March 6, 2010.TIGTA has a number of
ongoing audits related to the 2010 Filing Season.Individual audit reports will be issued at
the completion of each audit.

One
of the challenges the IRS confronts each year in processing tax returns is the
implementation of new tax law changes.The 2010 Filing Season presented additional challenges for the IRS due
to the enactment of two significant tax laws.In addition, the IRS is implementing the first phase of the Modernized e-File
system to process individual tax returns.

WHAT
TIGTA FOUND

As of March
5, 2010, the IRS received nearly 61.3 million tax returns.Of those, 51.6 million were electronically filed
(approximately equal to this time last year) and nearly 9.7 million were filed
on paper (a decrease of almost 20 percent from this time last year).The IRS issued nearly 52 million refunds
totaling approximately$160.2 billion.

The IRS recognized the difficulty taxpayers may
have in claiming new credits and/or deductions.In an attempt to reduce this difficulty, the
IRS created new forms, schedules, and instructions.The IRS also developed programming to
identify taxpayers who may not have claimed credits to which they were entitled
at the time they filed their tax returns.In addition, expanded math error authority is enabling the IRS to stop
the erroneous claiming of credits/deductions.However, implementing new tax legislation is still presenting
some challenges for the IRS which has resulted in the following:

·Increases
in error inventories resulting from taxpayers’ errors.

·Delays
in completing programming resulting in the inability to process tax returns
with First-Time Homebuyer Credit claims until February 16, 2010.

·Payment
of $24.2 million in erroneous Making Work Pay and Government Retiree Credits
and the inability to identify and prevent erroneous claims at the time tax returns
are processed resulting in more than $4.7 million in erroneous Plug-in Vehicle
Credits.

In
addition, as of March 5, 2010, the IRS had identified 119,484 tax returns with
$733 million being claimed in fraudulent refunds and prevented the issuance of
$721 million (98 percent) of the fraudulent refunds being claimed.

Finally, from
the beginning of the 2010 Filing Season, taxpayer demand for toll-free
telephone assistors has been higher than planned.The IRS states that call demand is higher
because more taxpayers than planned are calling to ask account-related
questions.It has received more calls
from individuals who owe taxes and believes the economic downturn is part of
the reason.As of March 6, 2010,
the IRS provided 960,161 services on the Individual Master File Balance Due
application, which is 243,983 (34 percent) more than the 716,248 services
provided for the same period last year.

WHAT TIGTA RECOMMENDED

This report was prepared to provide
interim information only.Therefore, no
recommendations were made in the report.

This report presents selected information related to the
Internal Revenue Service (IRS) 2010 Filing Season[1]
results as of either March 5 or March 6, 2010.[2]As part of our Fiscal Year 2010 Annual Audit Plan,
we are conducting a number of ongoing audits that are related to specific
issues in this report.[3]We will continue to provide IRS management
with information on any areas of immediate concern throughout our audit
process.

The American Recovery
and Reinvestment Act of 2009 (Recovery Act)[4] provides separate funding to the Treasury
Inspector General for Tax Administration through September 30, 2013, to be used
in oversight activities of IRS programs.This audit was conducted using Recovery Act funds.

This report was prepared to provide interim information
only.Therefore, we made no recommendations in the report.However, key IRS management officials
reviewed it prior to issuance and agreed with the facts and conclusions
presented.

Copies of
this report are also being sent to the IRS managers affected by the report
information.Please contact me at (202)
622-6510 if you have questions or Michael McKenney, Assistant Inspector General
for Audit (Returns Processing and Account Programs), at (202) 622-5916.

The IRS
expects to receive 138.5 million individual tax returns, which includes
97.5 million (70 percent) e-filed returns.

The filing season[5] is critical for
the Internal Revenue Service (IRS) because it is during this time that most
individuals file their income tax returns and contact the IRS if they have
questions about specific tax laws or filing procedures.During Calendar Year 2010, the IRS expects to
receive nearly 138.5 million individual income tax returns. The IRS estimates that it will process 41
million paper and 97.5 million electronically filed (e-filed)tax returns and
provide customer service assistance via telephone, web site, and face-to-face
assistance to millions of taxpayers.It is anticipated
that e-filed tax returns will continue to grow.The total e-file volumes are projected
to increase by about 3.4 percent (3.3 million) for the 2010 Filing Season.Online e-filed tax returns are
expected to increase by 4.3 percent.

One of the challenges the IRS confronts each year in processing tax returns
is the implementation of new tax law changes.Before the filing season
begins, the IRS must identify new tax law and administrative changes, and where
possible, revise the various tax forms, instructions, and publications.It must also reprogram its computer systems
to ensure tax returns are accurately processed.Problems with tax return processing could delay refunds, affect the accuracy
of accounts, and generate incorrect notices.

Two significant tax laws impact
the 2010 Filing Season

Two major tax law enactments impact the 2010
Filing Season.

·The American
Recovery and Reinvestment Act of 2009 (Recovery Act),[6] enacted on February 17, 2009, includes
20 individual taxpayer provisions that will cost nearly $252 billion. Figure 1 provides a summary of the individual
taxpayer provisions included in this Act.

·The Worker, Homeownership, and Business
Assistance Act of 2009[12]was enacted on November 6, 2009, to help
create jobs by providing tax cuts for homebuyers and businesses, while
providing much-needed support for workers who are still struggling to find
jobs. The legislation also extends and expands
the First-Time Homebuyer Credit along with adding anti-fraud measures.The credit of $8,000 is extended for homes
purchased or under contract by April 30, 2010. In addition, a smaller credit of up to $6,500
will be available to taxpayers that have lived in their homes for at least 5
years and wish to purchase a new home. The new law extends a similar credit until May
2011 for members of the uniformed services whose duty takes them overseas. The new law also contains important measures
to combat tax fraud and protect responsible homebuyers, including setting a
minimum age for home purchases and requiring documentary proof of the purchase
in order to receive the credit. Figure 2
shows the changes to the First-Time Homebuyer Credit legislation.

December 1, 2009, through April 30, 2010,
with the closing date of the purchase by June 30, 2010.

Dates
extended for 1 year for individuals on qualified official extended duty
outside of the United States (U.S.) for at least
90 days from December 31, 2008, to May 1, 2010.

Qualifying
Individual

Individual (and spouse, if married) having no
ownership interest in a principal residence in the preceding 36 months.

Phase-out of the credit begins at $75,000-$95,000
for individuals ($150,000-$170,000 for married filing jointly).

Individual cannot be a nonresident alien or
related to the seller of the home.

Individual (and spouse, if married) having no
ownership interest in a principal residence in the preceding 36 months.

Phase-out of the credit begins at $75,000-$95,000
for individuals ($150,000-$170,000 for married filing jointly).

Individual
cannot be a nonresident alien or related to the seller of the home.

Individual (and spouse, if married) having no
ownership interest in a principal residence in the preceding 36 months.

Phase-out of the credit begins at
$125,000-$145,000 for individuals ($225,000-$245,000 for married filing jointly).

Also includes a Long-Time Resident provision if
the individual (and spouse, if married) maintained the same principal
residence for any 5 consecutive years during the 8 years ending on the date
of the purchase.

Legislation

Housing and Economic Recovery Act of 2008

American Recovery and Reinvestment Act of 2009

Worker, Homeownership, and Business Assistance Act of 2009

Amount
of the Credit

10
percent of the purchase price up to a maximum of $7,500 ($3,750, if married
filing separately).

10
percent of the purchase price up to a maximum of $8,000 ($4,000, if married
filing separately).

10
percent of the purchase price up to a maximum of $8,000 ($4,000, if married
filing separately).

Long-Time Resident:Maximum of $6,500 ($3,250 if married filing
separately).

Recapture
of the Credit

Fully
recaptured over 15 years beginning in the 2010 Tax Year (if 2008 claim) or
2011 Tax Year (if 2009 claim).

If
the taxpayer sells the home (or the home ceases to be the principal residence
of the taxpayer or the taxpayer’s spouse) before the end of the
15-year recapture period, any remaining credit repayment amount is
immediately due on the tax return for the year in which the home is sold.

In
the case of an involuntary conversion, recapture is not accelerated if a new
principal residence is acquired within a
2-year period.

Fully
recaptured in year of sale if home is sold within 3 years of purchase.

In
the case of an involuntary conversion, recapture is not accelerated if a new
principal residence is acquired within a
2-year period.

Fully
recaptured in year of sale if home is sold within 3 years of purchase.

In
the case of an involuntary conversion, recapture is not accelerated if a new
principal residence is acquired within a
2-year period.

Waiver
of the Recapture of the Credit

Death of the taxpayer.

Sale of the home (including
through foreclosure) to an unrelated person with no gain on the sale.

Death of the taxpayer.

Sale of the home (including
through foreclosure) to an unrelated person with no gain on the sale.

Death
of the taxpayer.

Individuals
(and spouses, if married) on qualified extended duty outside the U.S.

Sale of the home (including
through foreclosure) to an unrelated person with no gain on the sale.

Documentation Requirement

None.

None.

Settlement
Statement (HUD-1 or equivalent) must be attached.

Source:TIGTA analysis of legislation.

The IRS expanded its
Modernized e-File (MeF) System to include individual tax returns

The IRS has used the MeF system
to process business tax returns for several years.In Filing Season 2010, the IRS is
implementing the first phase of the MeF system that will process individual tax
returns.The MeF system is replacing the
current IRS e-filing system (referred to as Legacy e-file) with a
modernized, Internet-based e-file platform.When completed, the MeF system will provide a
single method for filing all IRS tax returns, information returns, forms, and
schedules via the Internet.The MeF system
provides real-time processing of tax returns and extensions that will improve
error detection, standardize business rules, and expedite acknowledgments.The MeF system also allows for attachments in
portable document format to accommodate late legislation and form changes.

This first phase of the MeF system for individual income tax returns
includes the U.S. Individual Income Tax Return (Form 1040), Application for
Automatic Extension of Time To File U.S. Individual Income Tax Return (Form
4868), and 21 forms and schedules related to the Form 1040 for Tax Year 2009.[14]The
IRS began accepting the Form 1040, Form 4868, and the related forms and
schedules through the MeF system for processing on February 17, 2010.The IRS estimates approximately 72
million of the individual income tax returns filed during the 2010 Filing
Season would qualify for the MeF system.However, the IRS is limiting the number of individual tax returns
transmitted through the MeF system to 30 million with a maximum of 241,000 tax
returns transmitted per hour.Remaining e-filed tax returns will continue to be
processed through the Legacy e-file system.

This report provides selected information relating to the
progress of the 2010 Filing Season. We
have a number of additional audits that have or will be initiated that relate
to areas we have reported on in our interim report.[15]These interim 2010 Filing Season results are
being presented as of either March 5 or March 6, 2010.[16]This review was performed at the Wage and
Investment Division Headquarters in Atlanta, Georgia; the Submission Processing
function offices in Lanham, Maryland, and Cincinnati, Ohio; the Electronic Tax
Administration and Refundable Credits function in Washington, D.C.; the
Modernization and Information Technology Services organization Headquarters in
New Carrollton, Maryland; and the Fresno, California; Atlanta, Georgia; Kansas
City, Missouri; Cincinnati, Ohio; and Austin, Texas, Submission Processing
Sites.Later this year, we will issue the
2010 Filing Season report along with other reports covering many filing
season-related topics. We conducted this
performance audit in accordance with generally accepted government auditing
standards.Those standards require that
we plan and perform the audit to obtain sufficient, appropriate evidence to
provide a reasonable basis for our findings and conclusions based on our audit
objective.We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions based on
our audit objective.Detailed
information on our audit objective, scope, and methodology is presented in
Appendix I.Major contributors to the
report are listed in Appendix II.

The IRS recognized the difficulty taxpayers may have in
claiming new credits and/or deductions.In an attempt to reduce this difficulty, the IRS created new forms,
schedules, and instructions.The IRS
also developed programming to identify taxpayers who may not have claimed
credits to which they were entitled at the time they filed their tax returns.For example, the IRS computes the Making Work
Pay Credit for every taxpayer when the tax returns are processed and for those
eligible taxpayers who did not claim the credit, the IRS provides the
credit.In addition, expanded math error
authority is enabling the IRS to stop the erroneous claiming of
credits/deductions at the time tax returns are processed.

However, implementing new tax legislation is still presenting
some challenges for the IRS.These
challenges are resulting in increases in error inventories resulting from
taxpayer errors, payment of erroneous claims, delays in completing programming,
and the inability to identify and prevent erroneous claims at the time tax
returns are processed.In addition,
errors are hindering the success of the IRS’ implementation of its MeF system
to process individual tax returns.

As of March 5, 2010, the IRS received nearly 61.3 million tax
returns.Of those, 51.6 million were e-filed (approximately equal to this
time last year) and nearly 9.7 million were filed on paper (a decrease of almost
20 percent from this time last year).In
addition, nearly 52 million refunds totaling approximately $160.2 billion had
been issued.Figure 3 presents summary
tax return filing statistics.

Figure 3:Comparative Filing Season Statistics as of March 5, 2010

Cumulative Filing Season Data

2009 Actual

2010 Actual

% Change

Individual Income Tax Returns

Total Returns Received(in thousands)

63,851

61,287

-4.0%

Paper Returns Received (in thousands)

12,058

9,688

-19.7%

E-filed Returns Received(in thousands)

51,793

51,600

-0.4%

Practitioner Prepared

33,349

31,880

-4.4%

Home Computer

18,444

19,720

6.9%

Free File(also included in Home Computer total)

1,935

1,747

-9.7%

Fillable Forms (also included in Home Computer total)

141

139

-1.6%

Refunds

Total Number Issued(in thousands)

54,638

51,980

-4.9%

Total $(in millions)

$153,579

$160,186

4.3%

Average $

$2,811

$3,082

9.6%

Total Number of Direct Deposits(in
thousands)

44,744

44,032

-1.6%

Total Direct Deposit $(in millions)

$135,614

$143,600

5.9%

Source:IRS 2010 Weekly Filing Season Reports.Totals and percentages may not compute to
those presented due to rounding.

The e-filing rate is approximately the same so far,
but use of Free File continues to decrease

This year marks the 20th year of e-filing.Over 20 years, nearly 800 million tax returns
have been e-filed. This year, the IRS began receiving e-filed tax returns on January 15, 2010.
As of March 5, 2010, e-file volumes are about the same as the
volumes for the same period in 2009; however, there is a 6.9 percent increase in
tax returns from taxpayers who e-filed
from their home computers over last year.The IRS has continued to experience steady growth in e-filed tax returns over the past
several years.In Calendar Year 2003, of
the approximately 130.1 million individual income tax returns received by the
IRS, 40.7 percent were e-filed.In Calendar Year 2009, the percentage of e-filed returns increased to 66.1 percent
of the total individual income tax returns received.

The traditional IRS Free File program is a free Federal
online tax preparation and e-filing program
for eligible taxpayers developed through a partnership between the IRS and the
Free File Alliance LLC (group of private-sector tax preparation companies).The program enables eligible taxpayers to use
commercial tax software for free.Since
the inception of Free File, 27 million taxpayers have taken advantage of this
free program, accessible only through the IRS’ web site, IRS.gov.In addition, for the second year, the IRS and
its partners are offering Free File Fillable Forms, which opens up the Free
File Program to nearly everyone, with no income limitations.

Not many
taxpayers are taking advantage of the Free File or Free File Fillable Forms
options.

However, not many taxpayers are taking advantage of these
filing options.The Free File Program
volumes have decreased by 9.7 percent from this time in 2009, with Fillable
Forms totaling approximately 139,000, a decrease of 1.6 percent from 2009.

Recovery Act and Worker, Homeownership, and Business
Assistance Legislation

The Recovery Act and Worker, Homeownership, and Business Assistance
Legislation contain provisions to assist individual taxpayers.Figure 4 provides the volume and dollar
amounts of these credits/deductions taxpayers claimed as of March 5, 2010.

Extension and Modification
of Credit for Non-Business Energy Property and Modification of Credit for
Residential Energy Efficient Property

2.3
million*

$1.7 billion

Credit for Certain Plug-in
Vehicles

1,191*

$1,650,302

Conversion Kits Credit

485*

$1,145,204

Source: TIGTA analysis of 2010
Filing Season return volumes through March 5, 2010.* These amounts represent only those
that were claimed on an e-filed tax
return.Claims for these credits cannot
be identified on paper tax returns.

Taxpayers incorrectly calculating the Making
Work Pay Credit and/or not providing documentation for the First-Time Homebuyer
Credit have significantly increased error workloads.The Error Resolution System is responsible
for correcting taxpayer and return preparer errors, as well as errors made
during IRS processing of tax returns.Prior to the start of the filing season, we alerted the IRS to inaccuracies
identified in our review of controls and corresponding updates of the internal
guidelines used by employees working in the IRS Error Resolution function.We identified a number of inaccuracies in
these guidelines relating to new tax law changes.The inaccuracies involved missing or
incorrectly updated information.The IRS
made the corrections we requested.

·Incorrectly completing the new form Making
Work Pay and Government Retiree Credits (Schedule M).Individuals are incorrectly computing the
Making Work Pay Credit when also receiving the $250 Economic Recovery Payment. The $250 per person Economic Recovery Payment
was sent to individuals receiving Social Security retirement and disability,
and Veterans and Railroad Retirement benefits. Individuals still working in 2009 are also eligible
for the Making Work Pay Credit of $400 per worker, but must reduce the $400 by
the $250 payment and calculate their Making Work Pay Credit on Schedule M. Since the $250 payment was directly deposited
into the same checking accounts as their Social Security or other benefit
checks, some recipients did not know if they received the payment.When the amount on Schedule M does not match
IRS records, it is identified as an error.

The IRS sent reminders to tax professionals that the
amount on Line 10 of Schedule M must match the Economic Recovery Payment
received by the taxpayer in 2009 when they noticed a number of errors relating
to the calculation of this credit.If
taxpayers cannot recall if they received the payment, they were advised to
contact the respective agency to confirm whether they received the payment
before resubmitting their tax returns claiming the Making Work Pay and
Government Retiree Credits. However, to
date, more than 1 million e-filed tax
returns have been rejected and this issue is included in the top 5 errors on
paper tax returns.

In response to taxpayer confusion, the IRS is providing a lookup tool, “Did I
Receive an Economic Recovery Payment?” which gives taxpayers an easy way
to determine if they received the one-time Economic Recovery Payment.The Internet application became available
March 17, 2010, on IRS.gov.In addition,
beginning March 8, 2010, taxpayers can also call a toll-free number to access
the telephone application.

The IRS
estimates that 50 percent of the individuals claiming the First-Time Homebuyer
Credit will not attach the required documentation.

·Claiming the First-Time Homebuyer Credit but
not attaching the required documentation to the tax return.In response to fraudulent claims received in
the 2009 Filing Season, taxpayers claiming the First-Time Homebuyer Credit are now
required to provide documentation such as the Settlement Statement (Form HUD-1)
to support the claim for the Credit.In
addition, if the taxpayer is claiming the new long-time resident credit, the
documentation required above is requested along with documentation such as the
Mortgage Interest Statement (Form 1098), property tax records, or homeowner’s
insurance records for the 5 consecutive-year period.The IRS expects a 50 percent correspondence
rate based on the tax returns submitted to date because the taxpayers failed to
submit the settlement statement or submitted the wrong documents.

We will continue to monitor IRS efforts to reduce error inventories
throughout the filing season.

Errors are hindering the
successful implementation of the MeF system for individual tax returns

Our review of the implementation of the first phase of the
MeF individual tax return system has raised questions as to whether the MeF system
will achieve intended results.We have
concerns with the low volume of tax return transmissions being received by the MeF
system and the erroneous rejecting of tax returns.Both problems are negatively affecting the
effectiveness of the MeF system and hindering the IRS’ ability to gather
sufficient information to make decisions regarding future releases of the MeF
individual tax return system.

Tax returns
are erroneously rejected from the MeF system and volumes are significantly
lower than expected.

Implementation of the MeF system for individual tax returns
is a significant undertaking for the IRS.The IRS has used the MeF system to process business and corporate tax
returns for several years.However, in
comparison, individual tax returns involve many more issues resulting in more
complex programming and system requirements.Recognizing the challenges in implementing the MeF system for individual
tax returns, the IRS developed a volume plan to manage the volume of individual
tax returns and forms processed through the MeF system.The volume management plan limits the number
of forms to be processed through the MeF system during the 2010 Filing Season
so that the IRS and the tax return transmitters have an opportunity to observe
system behavior and responses.The IRS
intends to use the information it gathers during this filing season to improve
the individual tax return segment of the MeF system for next year with the
ultimate goal to have the MeF system replace the current Legacy e-file system in Calendar Year 2013.

Lower than expected tax return
transmissions

According to the MeF system volume management plan, the IRS planned
to allow for processing only 1.5 million (through the end of February 2010)
of the estimated 72 million individual tax returns that met the criteria for
MeF system processing.Transmissions would
increase another 4.4 million through the end of March 2010.However, as of March 5, 2010, the IRS has only
processed 98,596 tax returns through the MeF system.The IRS indicated that participation in the MeF
system was voluntary for the 2010 Filing Season with only six transmitters
actually participating in the MeF system as of March 8, 2010.According to the IRS, the volume management
plan was intended to provide volume limits per tax return transmitter to
maintain system performance not to establish expected tax return receipts.Regardless of the purpose of the volume
management plan, low tax return transmissions negatively impact the IRS’
ability to effectively evaluate MeF system performance.

Tax returns are erroneously rejecting
from the MeF system

The success of the MeF system this year has been hindered as
a result of erroneously rejected tax returns.The MeF system must ensure that only those tax returns that satisfy
various criteria designed to ensure tax returns are reasonably accurate are
accepted for processing.Any return that
does not satisfy these criteria is returned or rejected to the tax return
transmitter.As of March 5, 2010, 23,902 (24 percent) of the 98,596 tax returns
transmitted to the MeF system were rejected.[19]These
tax returns were rejected for 1 or more of 158 of the 434 business rules
(conditions that are checked for those tax returns processed through the MeF
system) in place on February 17, 2010.Our
analysis of 30 of these 158 business rules identified concerns with the
accuracy of the MeF system tax return reject process. We
alerted the IRS that 19 (63 percent) of the 30 rules we analyzed appeared to be
rejecting tax returns in error or rejecting the returns without providing accurate
explanations.These rules affect
a variety of tax issues including the Making Work Pay Credit, Earned Income Tax
Credit, and the validity of Social Security Numbers (SSN).

The IRS is actively
working with us and its internal and external stakeholders to monitor and
evaluate the functioning of the MeF system.The IRS has made a number of corrections and has provided guidance to
the stakeholder community to ensure the MeF system meets current and future
taxpayer needs.We plan to continue our
evaluation of the IRS’ implementation of the MeF system and we plan to issue a
separate audit report.

Taxpayers are electing to use the new savings bond option
and have increased use of the split refund option

On September 5, 2009, President Obama announced a new
initiative to make it easier for more than 100 million families to save a
portion or all of their tax refunds.Beginning in 2010, taxpayers have the ability to use their refunds to
purchase U.S. Series I Savings Bonds by requesting them on their tax return. Figure 5 shows the Direct Deposit of Refund to
More Than One Account (Form 8888) and new instructions developed for taxpayers
to purchase the savings bonds.

If their refund is an exact multiple of $50, but not more
than $5,000, taxpayers may request the entire amount be converted into a
savings bond by simply filling out the direct deposit section of their tax
return.Taxpayers whose refunds are not
exact multiples of $50 must complete a Form 8888 and identify where any
remaining refund should be deposited.Through March 5, 2010, 22 taxpayers chose to convert their entire
refunds in the amount of $20,550 into savings bonds.

Taxpayers can still elect to have their Federal income tax
refunds split and electronically deposited in up to three accounts (e.g.,
checking, savings, or Individual Retirement Arrangement) and may have up to three
different U.S. financial institutions, including banks, brokerage firms, or
credit unions.Form 8888 must also be
prepared for this option.As of March 5,
2010, 385,882 taxpayers chose to split their refunds of $1,701,827,906 between 2
or 3 different accounts, and $4,644,750 of this amount went to purchase 13,784
savings bonds. The number of taxpayers
using the split refund option increased 52 percent over the same time period in
2009, and the amount of refunds increased by 63 percent.

Figure 5:Form
8888 and New Instructions on Purchasing Savings Bonds

Figure 5 was removed due
to its size.To see Figure 5, please go
to the Adobe PDF version of the report on the TIGTA Public Web Page.

Implementing legislation for the 2010 Filing Season required
the IRS to update many tax products and perform extensive programming in an
effort to ensure tax returns would be processed accurately.We identified 71 tax products (33 tax forms,
12 instructions, and
26 publications) that required updating due to legislation.Fifty-nine of the 71 tax products were
updated clearly and accurately in accordance with the new tax law
provisions.Of the remaining 12 tax
products, 1 was unavailable for review as of March 5, 2010; 9 were incorrect,
and an additional 2 that contained inconsistencies were identified after we had
notified the IRS.Of the 9 that were
incorrect, 4 were missing needed updates to the tax forms even though the related
instructions had been updated, 4 had incomplete and/or inconsistent
instructions, and publication had inaccurate information.

On November 17, 2009, we notified the IRS of our concerns
regarding the nine tax products that contained inconsistencies, were incomplete,
and/or were inaccurate.IRS management
agreed to make revisions to six and indicated that they would consider changing
the Tax Year 2010 versions for the three that had already gone to print. However, as of March 5, 2010, the IRS had only
revised two and partially revised another of the six tax products. Appendix VI details specific issues we raised
relative to tax products and the IRS actions taken as of March 5, 2010, to
address these concerns.

In addition, the programming and processing of tax returns,
including credits and deductions available as a result of new legislation, are
causing challenges for the IRS.These
challenges include:

·Inability
to track and account for credits claimed for individual tax provisions.

·Incorrect
programming resulting in the allowance of erroneous claims.

·Inadequate
controls to identify erroneous claims at the time tax returns are processed.

Inability to track and account for credits claimed for
individual tax provisions

The IRS is unable to track and account for credits claimed for
individual tax provisions because processes have not been implemented to
capture information from the following tax forms included with paper-filed tax
returns:

The inability to track and account for the above credits
results in the IRS being unable to identify the number of taxpayers claiming
the above credits and the amount of credits claimed.We alerted IRS management of their inability
to track and account for Recovery Act funds.We recommended that the IRS implement Special Processing Code
programming to enable the IRS to track and account for these credits filed on
paper tax returns.Special Processing
Codes are entered on tax returns with certain conditions to alert the computer
to a special condition or computation.

The IRS agreed that it needs the ability to provide
transparent reporting of Recovery Act-related credits and responded that existing
and newly created processes will allow it to report on the use of these
credits.Programming will be implemented
to add Special Processing Codes to enable the IRS to track and account for
funds allocated as part of tax provisions included in the Recovery Act for taxpayers
claiming Electric Vehicle Credits on paper-filed tax returns.The implementation date for the programming
was originally February 18, 2010, but was delayed to March 2, 2010. We will continue to monitor the implementation
of this programming to ensure it is properly functioning.

Incorrect programming is resulting in the issuance of
erroneous Making Work Pay and Government Retiree Credits

Our review identified that as of March 5, 2010, the IRS
issued erroneous Making Work Pay and Government Retiree Credits to 84,705
taxpayers totaling $24.2 million.The
IRS developed programming to systemically compute the Making Work Pay and
Government Retiree Credits on tax returns on which the taxpayer appears
eligible for the credits.However,
errors in this programming are resulting in the issuance of erroneous credits.Issuance of erroneous credits is resulting
from programs:

·Incorrectly computing the Making Work Pay Credit
for taxpayers without a valid SSN.

·Incorrectly computing the Making Work Pay Credit
for taxpayers who indicate they are eligible to receive the Government Retiree
Credit.

Taxpayers without a valid SSN erroneously received the Making Work Pay Credit

The IRS computes the amount of the Making Work Pay Credit
for every Tax Year 2009 tax return processed.Tax returns in which the IRS’ computation of the Making Work Pay Credit differs
from the taxpayer’s are sent to the Error Resolution function for tax examiner
review.For the tax returns with a
discrepancy, tax examiners are required to review the tax returns and disallow
the credit for tax returns filed without a valid SSN.The Recovery Act provides that in order to be
eligible for the Making Work Pay Credit the taxpayer must provide an SSN.In the case of tax returns filed as married
filing jointly, one of the taxpayers must provide an SSN.[20]

As of March 5, 2010, we identified 518,262 tax returns in
which the taxpayer filed a tax return without a valid SSN.Tax examiners successfully denied the credit
for 477,675 (92 percent) of these tax returns.However, for the remaining 40,587 (8 percent), tax examiners failed to
correctly disallow the credit which resulted in taxpayers incorrectly receiving
more than $15.9 million in erroneous Making Work Pay Credits.It should be noted that 36,116 of these
taxpayers did not claim the Making Work Pay Credit. IRS programs computed the credit without
taking into account that the taxpayer did not use a valid SSN.

On February 5, 2010, we alerted the IRS of this condition
and recommended that the IRS immediately revise its tax return processing
programs to not compute an amount for the Making Work Pay Credit for taxpayers
who do not have a valid SSN and are not married filing jointly with a taxpayer
who does have a valid SSN.IRS
management responded that the issue had previously been identified as one that
could be resolved through a programming change and the change is scheduled to
be implemented nationwide on February 25, 2010.We determined this programming change has been made.

Taxpayers who indicate
eligibility for the Government Retiree Credit are erroneously receiving excess
credits

The Recovery Act provided for a special credit for certain
government retirees.If a taxpayer
received a pension or annuity from a government entity for work not covered by
Social Security, they are entitled to the $250 Government Retiree Credit.If the taxpayer also had income from wages or
other earned income, they may also be entitled to the Making Work Pay
Credit.In both situations, the Making
Work Pay Credit is reduced if the taxpayer received the Economic Recovery
Payment.[21]These credits are calculated and reported
using the Schedule M.The IRS tax return
processing system computes the Making Work Pay and Government Retiree Credits
on tax returns using formulas based on several factors.[22]Tax returns in which the IRS’ computation for
these credits differs from the taxpayer’s are sent to the Error Resolution function
for tax examiner review.

As of March 5, 2010, we identified more than 44,118
taxpayers receiving $8.3 million in excess Making Work Pay and Government
Retiree Credits because the Making Work Pay and Government Retiree Credits were
being computed incorrectly for tax returns that have a Special Processing Code
“M.”This code is entered on tax returns
when Line 11 on Schedule M has either a dollar amount or the “Yes” box is checked
indicating the taxpayer received a pension or annuity from a government entity
for work not covered by Social Security.

On February 19, 2010, we alerted the IRS of this condition and
recommended that the IRS immediately revise its return processing programs to
correctly compute the Making Work Pay and Government Retiree Credits on returns
with a Special Processing Code “M.”IRS
management responded that manual procedures for tax examiners to correct this
condition were issued.In addition, a
correction to the programming was requested and the programming should be
complete by April 1, 2010.We will
continue to monitor the implementation of this programming to ensure it is
properly functioning.

Controls are not adequate to identify some erroneous
claims at the time tax returns are processed

The ability of the IRS to verify the accuracy of and
eligibility for tax benefits and credits before a tax return has completed
processing and prior to release of funds is the most efficient and effective
approach for the IRS.However, in a
prior TIGTA review,[23]
we reported that the IRS cannot verify the accuracy of all of the legislated
requirements for 13 of the 20 Recovery Act tax benefits/credits for individual
taxpayers before the tax return has completed processing. The IRS relies on taxpayers to comply with tax
laws and provide correct information on their tax returns, including accurately
reporting income and claiming only tax benefits and credits to which they are
entitled. The IRS attempts to weigh the potential
burden that providing documentation can place on taxpayers when implementing
provisions.

We are continuing to review processed tax returns to confirm
that the IRS is verifying specific requirements for individual tax provisions
that can be validated at the time a tax return is received.For example, if a legislative provision
includes a requirement that the IRS verify provisions requiring a valid SSN, we
are evaluating whether the IRS is verifying the validity of the SSNs.

As of March 5, 2010, we have identified and reported to the
IRS additional verifications that can be performed to help ensure the validity
of benefits/credits being claimed.These
include:

·Ensuring that
the plug-in vehicle credit is not being allowed for nonqualifying vehicles based
on the vehicle year and in-service date.Our review of 5,265 e-filed tax returns[24] processed as of March 5, 2010, identified 828
taxpayers claiming more than $1.4 million in credits for vehicles with
nonqualifying vehicle years and an additional 145 taxpayers claiming $616,627 in
credits for vehicles with nonqualifying in-service dates.

·Ensuring
the plug-in vehicle credit is not allowed for nonqualifying vehicles based on
the make of the vehicle.Our review of 5,265 e-filed tax returns processed as of March 5, 2010, identified 955
taxpayers claiming nearly $2.7 million in credits that do not qualify based on the
make of the vehicle.

Based on our alerts, the IRS is implementing five new error
codes on March 30, 2010, to reject e-filed
tax returns with a vehicle year and/or in-service date that do not meet the tax
provision requirements for the plug-in vehicle credits.In addition, instructions have been issued to
tax examiners to enter a Special Processing Code on paper tax returns with
these problems and the credit will be denied.

However, the IRS did not agree to verify the make of the
vehicle during tax return processing because this would require IRS employees
to review the forms for several hundred different types of qualifying vehicles.It would also have a significant impact on
the number of tax returns that could be reviewed per hour.The IRS also believes this issue is best handled after
the tax return has been processed, and a Compliance Strategy being developed
for Recovery Act provisions will include tests in Fiscal Year 2011 for this
issue.We are concerned with the IRS’
decision because these verifications could be performed when Special Processing
Codes are included.Further, the cost to
address these tax returns subsequent to tax return processing will be
substantially more than addressing them at the time the tax return is
processed.We will continue to identify
erroneous claims based on nonqualifying vehicle make.

TheWorker,
Homeownership, and Business Assistance Act of 2009 revised, extended, and
expanded the First-Time Homebuyer Credit.This legislation along with the Recovery Act required the IRS to perform
extensive programming changes for the 2010 Filing Season.As a result, the IRS had to postpone
processing tax returns with the First-Time Homebuyer Credit until February 16,
2010.During the postponement of the
processing of these tax returns, the IRS received 91,911 tax returns nationwide
with the First-Time Homebuyer Credit.Initial results indicate the programs are working properly.

As of March 5, 2010, the IRS processed 93,030 tax returns
claiming $670 million in First-Time Homebuyer Credits.We selected a sample of 123 tax returns with
the First-Time Homebuyer Credit in the Fresno, California; Kansas City, Missouri;
and Austin, Texas, Submission Processing Sites to determine if the tax returns
are being processed correctly.[25]Characteristics of these 123 tax returns
include:

·20 that claimed $8,000 with attached supporting
documentation.

·60 that claimed $8,000 with no attached
supporting documentation.

·30 that claimed $6,500 with attached supporting
documentation.

·10 that claimed $6,500 with no attached
supporting documentation.

·The remaining tax returns reported dispositions,
changes in use, or repayments in Parts III and IV of the First-Time Homebuyer Credit and Repayment of
the Credit (Form 5405).

As of March 5, 2010, the IRS processed 19 of the 123 tax
returns we sampled.

·18 that
included supporting documentation for first-time homebuyers and long-time residents
claiming the credit and were properly allowed.

·The
remaining tax return did not have supporting documentation for a long-time resident
claiming the credit and was properly denied.

We
will continue to closely monitor the processing of tax returns claiming the credit.In addition, we have two ongoing reviews of
the credit, and one audit planned for later in Fiscal Year 2010.[26]

Unscrupulous individuals continue to submit tax returns with false
income documents to the IRS for the sole purpose of receiving a fraudulent
refund from the Government.As of
March 5, 2010, the IRS had identified 119,484 tax returns with $733,195,576 being
claimed in fraudulent refunds and prevented the issuance of $720,596,970 (98
percent) of the fraudulent refunds being claimed.This represents an 82 percent increase in the
number of tax returns identified as of this period last processing year.

Prior to the 2010 Filing Season, preliminary pre-refund reviews of
questionable identified tax returns were performed by the Criminal
Investigation Division.On October 11,
2009, the IRS transferred responsibility for the pre-refund detection
activities from the Criminal Investigation Division to the Wage and Investment
Division’s Accounts Management function as part of its Taxpayer Assurance
Program.Figure 6 shows the number of
fraudulent tax returns identified by the IRS for Processing Years 2006 through
2009, as well as the refund amounts that were claimed and stopped.

Figure 6:Fraudulent Returns and Refunds Identified and Stopped
by the Criminal Investigation Division (Processing Years 2006–2009)

Individual tax returns are sent through the IRS’ Electronic
Fraud Detection System and receive a data-mining score based on the
characteristics of the tax return and other data.A private vendor developed the data-mining
score, which is validated and updated before each processing year based on
experience and new information.The
higher the data-mining score, the greater the probability that the tax return
might be fraudulent.

For those tax returns meeting a certain score, the return is
sent to an IRS employee to screen the tax return for fraud potential.If a tax return is selected for further
verification, the refund is held until employers or third parties are contacted
to verify wage information on the tax return.If the verification process is not completed within a certain time
period, the held refund is automatically released.In general, if the employee concludes that a
tax return contains false information (e.g., false or inflated wages), the tax
return is referred to either the Accounts Management function or the
Examination functions[27]
for resolution.Tax returns with
refundable credits, such as the Earned Income Tax Credit, and tax returns for
which the refunds were issued must be sent to the Wage and Investment Division’s
Examination function because the law requires the IRS to follow deficiency procedures before making an assessment in
these cases.

In a prior TIGTA review[28]
assessing the transfer of pre-refund detection activities from the Criminal
Investigation Division to the Wage and Investment Division, we reported that
the IRS may have underestimated the number of employees needed to screen potentially
fraudulent tax returns, which could result in the IRS not having adequate staff
to identify and stop fraudulent refunds.In addition, we reported that a majority of individuals performing these
duties would be new seasonal employees.For the 2010 Filing
Season, the Accounts Management function reported that 200 (58 percent) of the
total 346 employees in the Taxpayer Assurance Program were seasonal tax examiners.However, the transfer of refund
detection activities from the Criminal Investigation Division to the Accounts
Management function and the significant hiring of seasonal employees have not
negatively affected the IRS’ efforts to identify and stop fraudulent
refunds.

Taxpayers have several options to
choose from when they need assistance from the IRS, including telephone
assistance through the toll-free telephone lines, face-to-face assistance at
the TaxpayerAssistanceCenters
and Volunteer Program sites, and self-assistance through IRS.gov.

Face-to-face assistance at the Taxpayer Assistance
Centers

The Taxpayer Assistance Centers are walk-in sites where
taxpayers can obtain answers to both account and tax law questions, as well as
receive assistance in preparing their tax returns.The IRS plans to assist more than 6.3 million
taxpayers in Fiscal Year 2010.Between
October 1, 2009, and February 13, 2010, the Taxpayer Assistance
Centers had served 2 million taxpayers, which includes 900,000 taxpayers
for the 2010 Filing Season.According to
the IRS, 78 percent of the taxpayers who waited to speak to assistors at
the 225 Taxpayer Assistance Centers that track wait time waited fewer than 30
minutes.

Figure 7 shows the number of contacts by product line at the
Taxpayer Assistance Centers for Fiscal Years 2007 through 2010.

In Fiscal Year 2007, the IRS implemented a standardized quality measurement system to
measure the quality of taxpayer service at its Taxpayer Assistance
Centers.Prior to this, the IRS
had used our audit results to measure the accuracy of assistors’ responses to
tax law questions.Our results showed an
accuracy rate of 51 percent in Fiscal Year 2002.The IRS reported a 69 percent accuracy
rate for Fiscal Year 2008 and a 75 percent accuracy rate for Fiscal Year 2009.As of February 28, 2010, the IRS had reported
a 79 percent accuracy rate for tax law questions and a 90 percent accuracy rate
for tax account questions.

Toll-free telephone
assistance

As of March
6, 2010, approximately 41.5 million taxpayers contacted the IRS by calling the
various Customer Account Services function[31]toll-free telephone assistance
lines[32] seeking help in understanding
the tax law and/or meeting their tax obligations.[33]For the 2010 Filing Season, the IRS expects increased demand because
taxpayers are calling:

To obtain the amount of
their Tax Year 2008 Adjusted Gross Income (AGI).During the 2009 Filing Season, the IRS received
approximately 4.8 million calls to obtain prior year AGI amounts.These calls were caused by the IRS discontinuing the use of U.S. Individual
Income Tax Declaration for an IRS e-file
Online Return (Form 8453-OL) for Tax Year 2008.Now that the Form 8453-OL is obsolete,
taxpayers choosing to electronically prepare and file their tax returns
are required to provide their prior year AGI or use a self-selected,
five-digit Personal Identification Number (PIN) as their signature.

To obtain information about
the Recovery Act provisions such as the Making Work Pay Credit, First-Time
Homebuyer Credit, Money Back for New Vehicle Purchases, and the new
American Opportunity Education Credit.

In order to reduce calls
to assistors requesting a prior year’s AGI, the IRS developed two methods that
taxpayers can use to obtain a PIN to e-file
their Tax Year 2009 returns.The PIN can
be used to e‑file rather than
the prior year’s AGI.

An
automated interactive telephone line, 1-866-704-7388.Using their telephone keypad, taxpayers enter their SSN, date of
birth, and Tax Year 2008 filing status.They are then provided a PIN they can use to e‑file their Tax Year 2009 returns.

An
e-file PIN application.Using a web-based application on IRS.gov, taxpayers enter their
name, address, date of birth, SSN, and Tax Year 2008 filing status.A PIN is then generated that taxpayers
can use to e-file their Tax Year
2009 returns.

The IRS also provides automated messages to address the
Making Work Pay Credit and other new tax legislation.Some of the tax provisions addressed on the
automated messages are:

From the beginning
of the 2010 Filing Season, taxpayer demand for toll-free telephone assistors
has been higher than planned.The IRS
states that call demand is higher because more taxpayers than planned are
calling to ask account-related questions.It has received more calls from individuals who owe taxes and believes
the economic downturn is part of the reason.As of March 6, 2010, the IRS provided 960,161 services on the
Individual Master File Balance Due application, which is 243,983 (34 percent)
more than the 716,248 services provided the same period last year.

The IRS
estimates that about 22.8 percent of the increase in call demand is
related to calls about taxpayers’ prior year AGI.

Also, the IRS
believes many of the unplanned calls relate to taxpayers requesting their prior
year’s AGI.As of March 6, 2010, the IRS
estimates that 22.8 percentof the increase in call demand is related to
calls about taxpayers’ prior year AGI.The
IRS projected that the automated PIN telephone line and e-file PIN application would handle approximately 85 percent
of the requests for a PIN to e‑file
their tax returns and only 15 percent would be handled by live assistors.

Of 7.1 million
taxpayers contacting the IRS to obtain an e-file
PIN, 6.4 million (90 percent) attempted to use one of the IRS automated
PIN applications.However, the actual success rate for
authentication for the e-file PIN
application for the first few weeks of operation was lower than projected.From January 18 through
February 27, 2010, the IRS had approximately 4.1 millionattempts on the e-file PIN application, but only approximately 2.3 million
taxpayers (57 percent) obtained PINs.As of February 27, 2010, the automated PIN
telephone completions were 1.6 million.About 425,000 callers (26 percent) were eventually routed to a live
assistor.

During the planning for the 2010 Filing Season, the IRS
developed a contingency plan if more taxpayers than planned called to request
their prior year AGI or obtain a PIN.In February 2010, the IRS changed the
automated PIN telephone message to ensure only those calls it believed needed
assistor interaction were routed to an assistor.To help reduce caller confusion, the IRS
deployed a new in-queue announcement on the main toll-free telephone line,
1-800-829-1040, to explain to callers they need either their prior year AGI or
a PIN, but not both.The IRS also
increased prior year AGI telephone staffing by redeploying employees from
business account applications and hiring 375 new employees to work
correspondence and handle prior year AGI calls.The IRS stated it used fewer than half of these employees to assist with
prior year AGI telephone calls.

The IRS lowered its key toll-free performance goals for
the 2010 Filing Season and Fiscal Year 2010

The IRS has set its Level of Service goal for the 2010
Filing Season and Fiscal Year 2010 below 80 percent.From 2003 to 2007, the IRS achieved an
80 percent or better Level of Service for the Filing Season.However, it has set the Fiscal Year 2010
Level of Service at 71 percent.The
IRS plans to answer more calls through automation leaving assistors to answer
the more complex questions, which usually take longer to answer.

As of March 6, 2010, the IRS planned to answer 8.2 million
assistor calls(1.9 million fewer assistor calls during the
2010 Filing Season than the 2009 Filing Season) and planned to achieve a 72.5
percent Level of Service and 651 second (11 minutes) Average Speed of Answer.IRS
assistors answered 8.6 million calls, achieved a 73.9 percent Level of
Service, and achieved a 599 second (10 minutes) Average Speed of Answer.

Figure 8 presents a year-to-date comparison of select
toll-free telephone system measures and service indicators.

Figure 8:Toll-Free Performance Measures and Service Indicators
for the 2007–2010 Filing Seasons[34]

One of the IRS’ goals for Fiscal Year 2011 is to bring its
telephone Level of Service up to 75 percent.To accomplish this, the IRS has requested a
program increase of $11.9 million and $9 million reallocation from the
Taxpayer Advocate Service, the Low Income Tax Clinic Program, Tax Counseling
for the Elderly Program, and the Volunteer Income Tax Assistance Grant Program
to improve the Level of Service from a projected 71 percent in Fiscal Year
2010 to a target goal of 75 percent in Fiscal Year 2011.If the $9 million reallocation is not
received, then the projected target goal for Fiscal Year 2011 would be lowered
by 1 percentage point to 74 percent.

Tax preparation assistance at Volunteer Program
sites

The Volunteer Program plays an increasingly important role
in the IRS’ efforts to improve taxpayer service and facilitate participation in
the tax system.It provides no-cost
Federal tax return preparation and e-filing
to underserved taxpayer segments, including low-income, elderly, disabled, and
limited-English-proficient taxpayers.These taxpayers are frequently involved in complex family situations
that make it difficult to correctly understand and apply tax law.

We plan to visit 39 Volunteer Income Tax Assistance and Tax
Counseling for the Elderly sites to determine if taxpayers receive quality
service, including accurate preparation of their individual income tax
returns.We developed scenarios designed
to test quality controls and present volunteers with a wide range of tax law
topics that taxpayers may need assistance with when preparing their tax
returns.The scenarios require a
determination of Making Work Pay Credit and Retirement Savings Contribution
Credit.In addition, one scenario
addresses the tax deduction for the purchase of a new vehicle.

As of March 5, 2010, we had 21 tax returns prepared with an
86 percent accuracy rate, which is higher than the 59 percent accuracy rate we
reported for the 2009 Filing Season.During
last year’s filing season, we observed that volunteers did not always use the
tools and information available when preparing tax returns.We will report our final results in August
2010.Figure 9 presents comparisons of
Volunteer Program activities for the 2007 through 2010 Filing Seasons.

Figure 9:Year-to-Date Comparisons of the 2007–2010 Filing Seasons
Through February 27, 2010

2007 Actual

2008
Actual

2009
Actual

2010
Actual

Volunteer
Return Preparation
(in millions)

1.3

1.5

1.3

1.2

Volunteer
E-Filing

94.4%

96.8%

98.6%

98.9%

Source:IRS 2007 through 2010
Filing Season Weekly Reports.

The IRS developed a new approach to measuring the quality of
tax returns prepared by the Volunteer Program by forming a Quality Statistical Sample cadre.The cadre reviewers initiated a statistically
valid sample of Volunteer Program sites, the results of which formed a
benchmark of volunteer-prepared tax return accuracy for the 2009 Filing
Season.The approach required that
reviewers at each site review randomly selected tax returns, comparing the
return information with supporting documentation, including end-of-year earning
statements and information the taxpayer provided the volunteer during the
mandated intake and screening process.Each year the combined
result of all the return review visits is considered the formal measure of
Volunteer Program-prepared tax returns.For the 2009 Filing Season, the cadre reviews concluded that 78 percent
of the tax returns prepared by volunteers were accurate.We plan to monitor 12 IRS visits and
randomly select a sample of the tax returns reviewed by cadre members to
determine the accuracy of the tax returns and the effectiveness of the IRS’ Quality Statistical Sample cadre review
process.

Self-assistance through IRS.gov

IRS.gov continues to be one of the most visited Internet
sites in the world, especially during the filing seasons.As of February 27, 2010, the IRS had reported
a 4 percent decrease in the number of visits to IRS.gov over the same period in
the prior filing season.It had also
reported an 11.8 percent increase in the number of taxpayers obtaining
their refund information online via the “Where’s My Refund” option found on
IRS.gov.Figure 10 shows the year-to-date
comparisons of various IRS.gov activity levels for the 2007 through 2010 Filing
Seasons.

The overall objective of this review was to provide selected
information related to the IRS 2010 Filing Season[37]
results as of either March 5 or March 6, 2010.To accomplish our objective, we:

I.Identified new tax legislation and administrative
changes for the 2010 Filing Season that will have the greatest potential affect
on individual taxpayers.

A.Reviewed tax forms, instructions, and publications to
determine whether they were accurately updated with the changes.

B.Reviewed tax return processing procedures and change
documentation to determine whether adequate controls were included to
accurately process the new tax provisions during tax return processing.

II.Determined the volumes of individual tax returns the
IRS is expecting to receive during the 2010 Filing Season by obtaining and
reviewing the Calendar Year Projections of
Individual Returns by Major Processing Categories (Document 6187), Fall 2009
Update, produced by the IRS Office of Research.

III.Identified volumes of paper and e-filed returns received through March 5, 2010, from the IRS Weekly
Filing Season reports that provide a year-to-date comparison of scheduled
return receipts to actual return receipts.The reports also provide a comparison to 2009 receipts for the same time
period.

IV.Determined the interim results of the implementation of
the MeF individual tax return system.

A.Identified volumes of tax returns transmitted to and
accepted by the MeF system for processing using the IRS Weekly E-File reports
that provide a year-to-date comparison of accepted and transmitted tax
returns.

B.Identified the volume of tax returns rejected by the MeF
system using the daily MeF Error Reject Report to monitor reject volumes as
well as tax return data obtained from the MeF system and the IRS Individual
Return Transaction File.

C.Evaluated the accuracy of the MeF system tax return
reject process using tax return data obtained from the MeF system and the IRS
Individual Return Transaction File.

V.Determined whether the IRS correctly implemented new
tax legislation and administrative changes that affected the processing of
individual tax returns during the 2010 Filing Season.We used computer analysis of 100 percent of
the Tax Year 2009 individual income tax returns processed nationally on the Individual
Return Transaction File between January 1 and March 5, 2010,[38]
to identify returns affected by recent tax legislation and administrative
changes and determined if they were processed correctly.We electronically identified:

1.45,546,537 tax returns processed claiming the Making
Work Pay and Government Retiree Credits (Schedule M) through March 5, 2010.

3.
93,030
tax returns processed with a First-Time
Homebuyer Credit and Repayment of the Credit (Form 5405) through March 5,
2010.In addition, we selected a judgmental
sample of 123 tax returns from the Fresno,
Kansas City, and Austin Submission
Processing Sites to determine if they were accurately processed when they had
supporting documentation or did not have supporting documentation.We used judgmental sampling to ensure that
the original returns could be quickly obtained to evaluate the accuracy of
processing.

A.Obtained
the Questionable Refund Program
Workload Comparison Summary Report as of March 6, 2010, to identify the
interim IRS fraudulent tax return statistics for the 2010 Filing Season.

B.Obtained
the Questionable Refund Program
Workload Comparison Summary Report for Processing Year 2009 and reviewed
a prior TIGTA report[39]
to obtain IRS fraudulent tax return statistics to determine the number of
erroneous refunds identified and stopped for Processing Years 2006 through
2009.

A.Obtained
from the IRS Field Assistance Office statistics on taxpayers served at the
Taxpayer Assistance Centers.

B.Reviewed
the IRS Weekly Filing Season Report, which provides a year-to-date comparison
of various TaxpayerAssistanceCenter
activity levels for the 2009 and 2010 Filing Seasons, through February 27,
2010.

A.Reviewed
Performance Templates and Executive Level Summary reports from the Enterprise
Telephone Data Warehouse for results as of March 6, 2010.

B.Reviewed
information relative to actions taken to address taxpayer questions for the
prior year AGI and Recovery Act provisions from IRS officials.

IX.Identified interim results for the Volunteer Program by
reviewing interim results from TIGTA visits to Volunteer Program sites.A total of 22 tax returns had been prepared
as of March 5, 2010.[41]

X.Identified interim results for IRS self-assistance
through IRS.gov from the IRS Weekly Filing Season Report of IRS.gov activity
levels for the 2009 and 2010 Filing Seasons, through February 27, 2010.

Internal controls methodology

Internal controls relate to management’s
plans, methods, and procedures used to meet their mission, goals, and
objectives.Internal controls include
the processes and procedures for planning, organizing, directing, and
controlling program operations.They
include the systems for measuring, reporting, and monitoring program
performance.We determined the following
internal controls were relevant to our audit objective:the processes for planning, organizing,
directing, and controlling program operations for the 2010 Filing Season. We also evaluated the controls that are incorporated
directly into computer applications to help ensure the validity, completeness,
accuracy, and confidentiality of transactions and data during application
processing of tax returns for the 2010 Filing Season.

Processing Individual Income Tax Returns Transmitted Through the
Modernized E-File System(Audit Number 200940047)

Audit Objective:Determine whether e-filed individual income tax returns transmitted through the MeF
system are processed timely and accurately in a manner consistent with those
tax returns processed in the Legacy e-file
system.

Process to Administer the
First-Time Homebuyer Credit (Audit Number 201040101)

Audit Objective: Determine whether the IRS has developed an effective strategy to
administer the First-Time Homebuyer Credit and to identify circumstances that
require recapture of the credit.

Toll-Free Access During the
2010 Filing Season (Audit
Number 201040017)

Audit Objective:Evaluate customer service toll-free telephone
access during the 2010 Filing Season.We will also follow up on a prior audit[42]
to evaluate the access/service specifically provided hearing- and
speech-impaired taxpayers.

Quality of Services at
Volunteer Program Sites During the 2010 Filing Season - Followup (Audit Number 201040018)

The
instructions for these two draft forms referred taxpayers to an Internal
Revenue Code section for the definition of a qualified plug-in vehicle rather
than simply providing the taxpayer with the definition of a qualified plug-in
electric drive motor vehicle as a
four-wheeled vehicle.

Add text
to Form 8910 to point out that alternative motor vehicles must have four
wheels and to review the other requirements in the Internal Revenue Code to ensure
they are adequately covered in the instructions.

The Instructions for the final
Form 8910and the instructions in the Final Form 8936 were both
updated to define a qualified
plug-in electric drive motor vehicle as a four-wheeled vehicle.

These three
draft forms did not include a calculation step or Caution on the front of the
form that informed or prevented taxpayers from claiming a double benefit for
the same vehicle on more than one of these forms.

Place Cautions at the top of the
2009 Forms 8834, 8910, and 8936 similar to the Cautions used on Alcohol and Cellulosic
Biofuels Credits (Form 6478) and Biodiesel and Renewable Diesel Fuels Credits
(Form 8864).

The Final Form 8834 was not updated to include the Caution.The IRS stated the caution would be added in 2010.

The Final Form 8910 was not updated to include the Caution.The IRS stated the caution would be added in 2010.

The Final Form 8936 wasnot updated to include the Caution.The IRS stated the caution would be added
in 2010.

Highlights of 2008 Tax Changes (Publication 553) (June 2009)

Under
“2009 Changes” for “New plug-in electric drive motor vehicle credit” it
states, “Has a gross vehicle weight rating of less than 14,000 pounds.”Less than 14,000 pounds is correct for Tax
Year 2010. For Tax Year 2009, the gross vehicle weight rating may be more
than 26,000 pounds.

Review
the tax products and articles on IRS.gov that refer to the gross vehicle
weight rating to ensure they are corrected and changed as needed.

As of March 5, 2010, the Tax Year
2009 version of Publication 553 has not yet been released.

The IRS stated a What’s Hot topic
will be posted on IRS.gov by March 31, 2010.

Instructions
for U.S. Individual Income Tax Return (Form
1040) and

Instructions
for U.S. Individual Income Tax Return (Form
1040A)

In the
brief section on the Refundable Education Credit (the American Opportunity Tax
Credit or AOTC) filers are referred back to an earlier section on Education
Credit where no information on this credit is provided. A reference to the Education
Credits (American Opportunity, Hope, and Lifetime Learning Credits) (Form
8863) and instructions where the American Opportunity Tax Credit is fully
addressed would be more helpful.

Consider updating the 2010 versions of these two
tax products since the 2009 versions had already gone to print for 2009.

The TIGTA will follow up on this
issue during our tax product review for the 2011 Filing Season.

Instructions for Form 1040 and for Form 1040A and

Making
Work Pay and Government Retiree Credits (Schedule M)

These three tax products do not
inform the taxpayer that an SSN is required to be eligible to claim the
Making Work Pay Credit and Government Retiree Credit.

Consider
updating the 2010 versions of these three tax products since the 2009
versions had already gone to print for 2009.

The TIGTA will follow up on this issue during our tax
product review for the 2011 Filing Season.

Calculated
after certain adjustments are made but before standard or itemized deductions
and personal exemptions are subtracted.

Average
Speed of Answer

The
average number of seconds taxpayers waited in the assistor queue (on hold)
before receiving services.

Blocked Call

A
telephone call that cannot be connected immediately because either no circuit
is available at the time the call arrives (i.e., the taxpayer receives a busy
signal) or the system is programmed to block calls from entering the queue
when the queue backs up beyond a defined threshold (i.e., the taxpayer
receives a recorded announcement to call back at a later time).

Earned Income Tax Credit

A
refundable Federal tax credit for low-income working individuals and families.

Electronic Fraud Detection
System

An
automated system used to maximize fraud detection at the time tax returns are
filed to eliminate the issuing of questionable refunds.

Enterprise Telephone Data Warehouse

The
official source for all data related to toll‑free telephone system measures
and indicators.

Error Resolution System

Responsible
for correcting taxpayer and return preparer errors, as well as errors made
during IRS processing of tax returns.

Filing Season

The
period from January 1 through April 15 when most individual income tax
returns are filed.

Fiscal Year

A
12 consecutive month period ending on the last day of any month, except
December.The Federal Government’s
fiscal year begins on October 1 and ends on September 30.

Free File Program

A
free Federal tax preparation and electronic filing program for eligible
taxpayers developed through a partnership between the IRS and the Free File
Alliance LLC.The Alliance is a group of private-sector tax
software companies.

Individual Return
Transaction File

Contains data transcribed from initial input of the original
individual tax returns during return processing.

Level of Service

The
primary measure of service to taxpayers.It is the relative success rate of taxpayers who call for live
assistance on the IRS
toll-free telephone lines.

Making
Work Pay Credit

A
refundable tax credit of 6.2 percent of wages. The maximum credit is $400 for individuals
and $800 for married couples.

Master
File

The
IRS database that stores various types of taxpayer account information.This database includes individual,
business, and employee plans and exempt organizations data.

Processing Year

Calendar
year in which the return or document is processed by the IRS.

Questionable Refund Program

A
nationwide, multi-functional program designed to detect and stop fraudulent
claims for refunds on income tax returns.

Submission Processing Site

The
data processing arm of the IRS.The sites
process paper and electronic submissions, correct errors, and forward data to
the Computing Centers for analysis and posting to taxpayer accounts.

Tax Year

The
12-month period for which tax is calculated.For most individual taxpayers, the tax year is synonymous with the
calendar year.

Taxpayer Assistance Centers

Walk-in
sites where taxpayers can obtain answers to both account and tax law
questions, as well as receive assistance in preparing their tax returns.

Volunteer Program

Includes
the Volunteer Income Tax Assistance Program, Tax Counseling for the Elderly
Program, and Volunteer Income Tax Assistance Grant Program.The Volunteer Program provides free tax
assistance to persons with low to moderate income (generally $40,000 and
below), the elderly, persons with disabilities, and persons with
limited-English proficiency who cannot prepare their own tax returns.

[7] The Alternative Minimum Tax relief section includes
2 provisions and the Plug-In Vehicle section includes 4 provisions for a total
of 20 provisions.

[8]
Estimated over 11 years (2009 through 2019) by the Joint Committee of Taxation,
Estimated BudgetEffects of the RevenueProvisionsContainedintheConferenceAgreement for H.R. 1, The “AmericanRecovery
andReinvestmentTaxAct of 2009” (JCX-19-09,
dated February 12, 2009).

[9]
Estimated by the Treasury Inspector General for Tax Administration based on
historical statistics from Tax Year 2006 and Tax Year 2009 projections.

[14] See
Appendix V for a list of the specific forms and schedules that will be
processed through the MeF system.

[15] See
Appendix IV for a list of ongoing or planned audits relating to areas reported
on in the interim report.

[16] Results
were provided as of either March 5 or March 6, depending on the date the IRS
reported the respective data.

[17] Tax returns
claiming the First-Time Homebuyer Credit between February 16, 2010, and March 5,
2010.

[18] The
Additional Deduction for State Sales Tax and Excise Tax on the Purchase of a
Qualified Motor Vehicle can be claimed on either the Itemized Deductions (Form 1040,
Schedule A) or the Standard Deduction for Certain Filers (Form 1040, Schedule
L).The amounts identified on Schedule L
were the IRS amounts because the schedule is not transcribed.The amounts identified on Schedule A were the
amounts claimed by the taxpayer.

[19] A tax
return may be submitted and rejected by the MeF system more than one time.

[20] For
purposes of this section of the Recovery Act, the SSN does not include a Taxpayer
Identification Number issued by the IRS.

[21] Economic
Recovery Payments were sent to taxpayers that received Social Security
benefits, Supplemental Security Income benefits, Railroad Retirement benefits,
or Veteran’s Affairs disability or pension benefits.

[23]Evaluation of the Internal Revenue Service’s
Capability to Ensure Proper Use of Recovery Act Funds (Reference Number 2010-41-011,
dated November 27, 2009).

[24] As we
previously discussed in this report, we are unable to identify paper tax
returns with these claims as the IRS is not transcribing applicable
information.The IRS has implemented a
Special Processing Code to enable future identification of paper tax returns.

[25]
Judgmental sampling was used to ensure that the original returns could be
quickly obtained to evaluate the accuracy of processing.

[26] See
Appendix IV for a listing of ongoing or planned audits relating to areas
reported on in the interim report.

[27]
According to the referral procedures, fraudulent refund returns are forwarded
to either the Wage and Investment Division Examination function or the Small
Business/Self-Employed Division Examination function.The majority of fraudulent refund returns are
forwarded to the Examination function in the Wage and Investment Division.For purposes of this report, we will use the
generic “Examination functions,” unless we need to refer to a specific Division
for clarification.

[28]Insufficient and
Inexperienced Staff Could Reduce the Ability to Detect and Stop Fraudulent
Refunds (Reference Number 2010-40-017, dated January 8, 2010).

[29] The
Fiscal Year 2007 data are not comparable to prior year data.In Fiscal Year 2007, the IRS changed its
method of counting TaxpayerAssistanceCenter
contacts by capturing the number of services provided rather than the number of
taxpayers assisted. In Fiscal Year 2008,
the IRS reverted to capturing the number of taxpayers assisted.

[30]Other Contacts include U.S. Departing Alien
Income Tax Statement (Form 2063), date-stamping tax returns brought in by
taxpayers, screening taxpayers for eligibility of service, scheduling return
preparation appointments, helping taxpayers with general information such as
addresses and directions to other IRS offices or other Federal Government agencies,
and virtual contacts.

[31] The
Director, Customer Account Services, Wage and Investment Division, manages tax
law and account telephone calls through the JointOperationsCenter.

[32] The IRS
refers to the suite of 22 telephone lines to which taxpayers can make calls as “Customer
Account Services Toll-Free.”

[33]
Toll-free telephone assistance data presented in this report were taken from
available IRS reports through the week ending March 6, 2010, and comparable
periods for prior years.

[34]The IRS averages its measures throughout the
year.It does not weight them.

[35] The IRS
refers to calls that disconnect before reaching the queue as primary
abandons.

[36] A
secondary abandon occurs when a caller gains access into the queue and then
hangs up while waiting in the queue for the next available assistor.

[38] To
assess the reliability of computer-processed data, programmers in the TIGTA Office of Information Technology validated the
data that were extracted, and we verified the data with appropriate
documentation.Judgmental samples were
selected and reviewed to ensure that the amounts presented were supported by
external sources.As appropriate, data
in the selected data records were compared to the physical tax returns to
verify that the amounts were supported.

[40]Toll-Free Access During the 2010 Filing
Season (Audit Number 201040017).

[41]Quality of Services at Volunteer Program
Sites During the 2010 Filing Season- Followup (Audit Number 201040018).

[42] The Internal
Revenue Service Has Opportunities to Provide Hearing- and Speech-Impaired
Taxpayers With Easier Access to Toll-Free Telephone Services (Reference Number 2003-30-111, dated May 30, 2003).